We can be set up for quite a bit of market volatility. Names that are supposed to have the best earnings growth in 2027 are some of the weakest names in the market over the course of the last few weeks. You have to manage your limits. You have to manage your exposure. If the AI trade begins to roll over, you have a counterweight on the scale. There's really no case to be made for complacency anymore.
This is "Bloomberg Surveillance" with Jonathan Ferro, Lisa Abramowicz, and Annmarie Hordern.
Live from New York City this morning, good morning, good morning. For our audience worldwide, "Bloomberg Surveillance" starts right now. Coming into Friday, picking up the pieces. The Nasdaq struggling to bounce following the worst day since June, as credit spreads are blowing out to the widest levels of the year so far. Tech traders leaving some of the biggest IPO candidates on the planet trimming their valuations.
OpenAI coming out with a $30 billion round of financing, and values the company at $2.25 trillion, down from the initial talks for this round of financing. It is not Armageddon for the company. It is higher than the last round of financing. It is not the end of the AI trade just yet, it is just a different trade. It is about the costs of financing, who has access to the financing.
High yield spreads wider by something like 80 basis points since the end of August. Around three to 3.50 historically. That is still pretty tight. However, the move is starting to pick up. That's where you start to see a reassessment of the price of capital at the cost of the buildout.
This is something Torsten Slok was talking about yesterday. We talk about the AI trade being rate insensitive. It is not spread insensitive. If you take a look at CoreWeave, even Oracle bonds that have dropped in the space of a couple of months, you are talking about 16% yields that become cost prohibitive for a lot of these companies. They are bumping up against credit risk and that is torpedoing some of these trades.
Month to date, where tech goes, yields go. The Nasdaq down by close to 5% on the month so far. 10-year yields, the yield on the 10-year down by some 30 basis points. The mother of all moves lower in yesterday's session.
What is not being correlated right now with what we are seeing in yields is look at where we are right now when it comes to global energy prices. WTI north of $100 a barrel, Brent is $114 a barrel. Yields coming down because guess what? This is a safe haven trade. Once we have everyone flocking into Treasuries because there is all these concerns. Jim Reid said it best, the wobbles of recent weeks have all collided at once.
We start to see that breadth. Cam Dawson was talking about yesterday at New Edge. Utilities higher by 8% for the month of October.
Staples closed at a record high for the first time since February. When you look under the hood of equal weight outperforming and having a day yesterday, it does not look like some sort of endorsement screaming strength. It looks like some of these havens and rate proxies doing really well. Yesterday, biggest one-day decline on 10-year yields going back to 2024 in August, so that's more than two years since we have seen that in the face of oil prices spiking and the potential for inflation still running high.
Equity futures on the S&P down by about 0.25%. We will catch up with John Hancock on the flight to Treasuries, Dan Ives on OpenAI as they trim valuation target, and the former New York Fed president Bill Dudley on why the new Fed looks like the old Fed. We begin with stocks struggling to bounce following the recent tech rout. The high cost of capital is clashing with highly leveraged AI companies. Treasuries are starting to get a bid and are acting like nice diversifiers. Let's start with the tech trade. What is going wrong?
You are hearing earnings reports and they want a blank check book and the market is sick of hearing this. The cost of capital is going up. At the end of the day, we have been talking about this. We have had higher interest rates and it had not really weighed on the market. In September, rates backed up. Markets kind of smooth sailed through it. This cost of capital is higher, we want all this capital, those don't add up, so we are starting to see some weakness. The earnings are good. Even take a drop from the tech trade and put anywhere else, and lo and behold, that part of the market does really well. You have got to be careful because the index concentration is at all-time highs all over the planet, from emerging markets to the United States, and you've got to diversify that exposure.
We are still managing to tread water, which is pretty impressive. A massive gap lower on the semis. The index still within 2% of record highs just about on the S&P 500. How do you view things? A headwind to further gains or a source of further downside?
We are shopping around. You could get an end-of-the-year bid in terms of risk on and looking for capital to find a way to make this market rally. In our view, it is a great time to prune risk. Bonds are working again. We are still at about a 5% yield, you could almost get a 6% yield on investment grade corporate bonds now. No one wants it. We are just starting to feel a little bit of a dip into the bond market. We are still getting an amazing income stream, best in 20 years. This sounds a lot like 2018 to us. What you had was a mid-cycle fiscal stimulus rush, with the one big beautiful bill, it looks a lot like the Tax Cuts and Jobs Act of 2018. Yields peaked in October of that year. In 2018, the end of the year was not a great time to be an equity investor. Because rates backed up and because you got the max hawkishness out of the Fed, it was a great time to rotate into bonds. No one has wanted that in a while. Now might be the good time to think about it.
I wonder what risk means now. We are talking about risk tied to AI going into investment grade bonds that are a lot of AI bonds, AAA bonds and AA bonds tied to the hyperscaler trade. You go into Treasuries, you talk about an economy that does not have the same stream of income if the AI trade does not outperform. How uncorrelated are some of these fixed income instruments?
At the end of the day, we are seeing a small addition. If you keep these run rates up in terms of issuance on the debt side, corporate bonds are going to feel a lot more of this AI trade. We are at about $200, $300 billion on a $2 trillion market. It is not that massive. You are moving up in the capital structure which is nice relative to the equities. The equity issuance keeps compounding. Even this week, we hear these hyperscalers like we are going to add all this in equity for you next year. And others in the communication services have said more equity. That is in our view more risk. The equity market capitalization is almost $70 trillion, it is massive relative to the economy. The bond market has incrementally grown but it is not the same in terms of magnitude. At the end of the day, it is the backup in yields. All you have really seen is real yields or growth. The growth component has been driving the backup. In 2018, that happened because of the tax cuts and then you got an air pocket into the next year. We think in 2027, you are going to get a reversal in this growth impulse from the pull of the tax cuts and you get yields coming down. In our view, Treasuries have that. Investment grade corporate, the duration is almost seven years and you are getting almost a 6% yield. That could be a double-digit return. No one has wanted that. You can chase equities somewhere. At the end of the day, you could do high single-digit, low double-digit type returns on fixed income, half of that being income.
About a year ago I was speaking with Howard Marks and he said if you're going to be part of the AI trade, invest in equities and not the bonds because you could capture some of the upside, and in the bonds, all you can do is capture the downside and you're not getting compensated. Have we reached the 180 on that, where you are getting compensated in bonds and in equities you are not getting compensated for risk, and there is the extra risk that a lot of these companies are going to have to finance themselves through stock sales, not through bond sales going forward, therefore diluting their shares?
Talk about the concentration in equities and without that, it's really hard to catch the upside. In our view, you don't want to go over your skis, you don't want to be overweight equities in general or overly concentrated on this risk. I think that is the right call. On the debt side, these yields and the spread widening, you're taking this additional credit risk, you are not getting that much compensated for the additional return potential. If we get a late push or end-of-the-year risk-on pulse rally because of sentiment, I think tech will reverse. South Korea KOSPI could double bottom. It is holding on by a thread. The whole semi space in terms of a technical picture is holding on by a thread. I don't love it. Where we are doing it is, you know, more higher-quality on the bond side. You don't need to be risky right now on bonds. Boring bonds can get the job done. You don't need a lot of the AI stuff in there. We are looking at defensive sectors like utilities on the bond side. Again, nice earnings growth, not a bad place to be.
That last 30 seconds captured the year so perfectly well. A U.S.-based investor saying I'm looking at South Korea. Hasn't that been the year so far?
I was laughing to myself because it is looking at two companies, Samsung and SK Hynix. How are they performing?
Next week we will be looking to Google, Microsoft on Thursday, Amazon. How will the market respond to higher capex from those three next week?
I cannot believe you forgot about the Fed meeting next week. This is going to be about how much you are going to spend. They could come with great earnings but we have to watch Warsh. It's the intersection of these things colliding, wanting capital and higher cost of capital. It adds up to volatility and you've got to be careful with that.
I would never forget the Fed.
You clearly forgot the Fed.
Talking exclusively about three companies. Let's talk about those three companies. If I give you the information, can you guess the outcome of the market? If I give you their earnings up front for Google, Amazon, and Microsoft, and I tell you what the capex numbers are, can you guess how the market will receive it?
Absolutely not. Tesla reported less than expected capex plans, got punished. You have Meta coming out with more ambitious plans, and they got punished, because why are you doing this to us? Over to you, Google and Microsoft.
We assess the credit risk of Meta and everything spirals from there. A struggle to bounce on the S&P this morning. The Nasdaq so far just about unchanged following the biggest one-day slide we have seen on that particular index going back to June. Let's get you an update on news worldwide this morning. With your Bloomberg Brief, Vonnie Quinn has more.
In Brazil, Bolsonaro and President Lula da Silva head to a runoff election Sunday. According to the latest poll, the candidates are tied at 50% each. Both campaigns are actively filing petitions to disqualify their rival over alleged social media interference and the abuse of economic power. President Trump asked Elon Musk to lift restrictions on Starlink service in Ukraine. The Wall Street Journal reporting Trump was frustrated that connection speeds remained limited. He depends on Star Shield, a militarized version of Starlink, to help with air defenses and artillery targeting. Shares of Kering plunging in French trading, Gucci sales falling more than expected in the third quarter, weakness in China undermining the brand's years-long turnaround effort. Kering lagging as Gucci's products fail to entice high-end shoppers. And that is your Bloomberg Brief.
LVMH down 40% year to date. Kering down 40% year to date.
Huge issues in China. The consumers not buying into luxury in the same way they used to. These stocks are getting a battering because of what is going on with Europe right now, especially LVMH, in terms of riots. Kering is interesting because it is really a Gucci problem. If Gucci goes well, Kering does well.
That turnaround effort continues. That's the latest on luxury. Next on the program, the president touting truce.
More oil came out of the Hormuz Strait last week than at any other time, even before the war. When the war in Iran ends, oil is going to be even less.
And yet oil is not coming down. Jonathan Lieber of Eurasia Group joins us next. Live from New York City this morning, good morning.
Snapped a three-day climb on the S&P 500 in yesterday's session. This morning we are not bouncing, following the worst day since July. On the Nasdaq, the worst day since June. The slide for big tech continues through the week, down about 5% on the month. Where tech goes, yields go too. Yields on the 10-year at more than 30 basis points lower than last Wednesday. 4.98 on 10s this morning. We were in the 5.30s on hotter-than-expected CPI.
People are seeing potential for 5% return on assets as a real positive and that lies in the question of how much financing they can get and at what cost. The idea that they can have an ambition of selling $50 billion of debt if they want to, and the market saying no thanks, and if you do that you will pay us some big deals. There are not many that can do that.
There has been a decoupling between the bond market and crude. Brent is still climbing. People are starting to think more and more about the demand destruction if we lose the support of tech investment. That is a question this morning. Brent pushing 114.50. WTI creeping into triple digits.
The region is fragile and you have more reports about the escalatory measures the Houthis are taking on Saudi Arabia. The Strait of Hormuz, there is some crude getting out but getting it out has cost so much more money in terms of the insurance costs and the freight costs. At the same time there is the geopolitical risk premium that you have reports once the midterm election is over the United States might start strikes on Iran.
The president touting crude flows.
More oil came out of the Hormuz Strait out of the last week than any time previous, including before the war. They have not gotten one barrel of oil in a long time. They are not doing too well. When the war in Iran ends your oil price will be lower. There is so much oil.
Crude on track for a third weekly gain with multiple attacks on Saudi Arabia raising concerns for a wider war.
Let's start by the discrepancy. Crude is flowing through the Strait of Hormuz. We have data to provide evidence of that. President Trump says pre-war record levels are flowing through the waterway right now. Brent crude is edging towards $115 per barrel. That discrepancy is widely perceived by the market because of that potential risk of the war escalating even further after that November 3 date, the midterm elections. There have been so many reports of escalation in the narrative that we could see a return to direct involvement by the United States and Israel hitting Iran. The New York Times reporting earlier this week there were plans discussed by the United States and Israel to come back to hitting Iran. The foreign minister of Iran saying if that were to happen Iran is more than prepared for the consequences and the consequences would catch up to the global economy and would hit civilian targets. That is an escalation in the narrative in the context of the wider war. We are still monitoring the escalations in Saudi Arabia and the Houthis hitting Saudi Arabia. The casualties this week at an airport in the eastern province. We have also reported that Aramco's headquarters told employees to work from home after an alarm was sounded. We do not know the reasons behind the alarm sounding. A volatile situation creating an energy market upside not just in Brent crude, crude products, diesel, which is key to President Trump.
Crude still climbing. Jonathan Lieber of Eurasia Group joins us for more. Good to see you. Let's start with a question that leads from some of the reporting. You assume when the midterms end the conflict restarts?
Probably. There are plenty of indications right now. You have Israel chomping at the bit ahead of their election to resume the attacks. The president has said he will not attack before the midterms but he is also constrained because you look at the firepower the U.S. has in the region. Right now it is down to two carrier groups. Previously it was down to one but one of those groups was in Thailand on leave. Towards the end of November there will be three carrier groups. This depends on the status quo in the strait and how long this is sustainable for the U.S. If they are getting enough transit out that takes some of the pressure off of the U.S. to re-escalate, which is why this question of how much oil is flowing out of the strait is so important.
When it comes to this decision whether or not to reengage with strikes in Iran, are you saying it is more logistical than political?
There is a political element. The midterm election is one factor constraining the president from re-escalating against the Iranians. Another factor is that until very recently oil prices have been relatively capped around $105 per barrel. Now you're starting to see that pressure upwards. That is putting pressure on President Trump. Another factor is on the Iranian side. The Iranians no longer have barrels they can sell. As that happens their budget will be constrained. The U.S. theory of the case is the Iranian government will collapse. The U.S. probably thinks the Iranians need an extra nudge to move towards that collapse or the capitulation they are looking for. That is why it seems likely the U.S. will attack again after the midterm constraint is out of the way.
When the president does do that he will be facing off with a Democratic House and Democratic Senate. Is there anything you think Congress can do to push back on that?
Not really. They do not have enough votes to stop him. He can veto any bills he does not like. They have had some symbolic votes and they can continue to have symbolic votes that will rein him in, but as we have seen time and time again I don't think President Trump will be stopped by what Congress wants to do. I think the most important power they have is the power of the purse. The White House has been extremely clever about moving money around to make sure their priorities keep getting funded. At least for the near to medium term Congress is not going to be a significant constraint on his abilities.
How do you make sense of what is going on with the U.S. and Ukraine in the election, with this fear of the election as President Trump looks to try to shore up diesel in any place?
He is mad at Zelenskyy for blowing up Russian refineries when diesel prices are going up and hurting Trump in the Midwest and some of these deep red states Republicans should be walking away with but they are not. That drove him to do this deal with Vladimir Putin. Trump sees blame on both sides of this war, kind of bafflingly to be honest with you. He said repeatedly he does not think President Zelenskyy wants to end the war and President Zelenskyy has stoked his ire by continuing to attack Russian refineries despite Trump asking him not to do that. I am more curious about what President Zelenskyy is up to and why he felt like he should keep attacking the refineries given Trump asked him not to. I think Trump's response is calling into question the commitment to the ongoing defense of Ukraine.
He keeps pushing and pushing. Jonathan Lieber of Eurasia Group. In regards to the midterms, you can learn a lot about where they are campaigning in the final few weeks of campaigns. Heading to Iowa. This has been a Republican stronghold for a decade and that is where the president is spending time. That tells you how difficult things are for Republicans.
When people are talking about how much of a sweep the Democrats will have, it is not whether they will sweep, it is the number of seats taken and how many states will be turned blue. How sustainable is that?
Deep red western Iowa. The issue for farmers is that it is a double whammy. High tariffs, hard to get products to places like China with the tariff war, now high diesel prices hurting them.
Up next we'll catch up with Dan Ives, get back to the tech trade as OpenAI drops its target. Plus Isabelle Lee has your morning movers. Live from New York City, you are watching Bloomberg TV.
The worst day since July on the S&P, worst day since June on the Nasdaq and no bounce heading into the weekend. Down 0.2% on the S&P. No change on the Nasdaq. The Nasdaq getting hammered, the Nasdaq down about 5% through October so far into November. Where tech goes, yields go. This is becoming a bigger and bigger slice of the economy. The trade on tech is a trade on the cycle. Your 10-year yield is down 30 basis points through October on the back of these moves in tech. If you get a move like that, the chain reaction for rates back into equities comes, you get staples and utilities starting to outperform. Staples up 11% in October. Record highs.
Very unusual lack of correlation between market-weight S&P 500 and equal weight because of this dynamic you are talking about, because of the staples and utilities and the outperformance you are seeing. Are we seeing a massive rotation keeping things close to all-time highs or is it the beginning of a deterioration in the AI trade that could threaten the cycle? How much are we playing on that on the margins?
As you indicated, within the massive turn in the index, becoming more defensive. You've had a rate shock and an energy shock. What we escaped was a growth scare. You reprice in the cycle and what is emerging is a growth scare. You see that to some extent in tech and in yields.
If you do not have the AI trade, what do you have in terms of growth in the U.S. economy and globally? That is the fear. Before we get there there is a question of are we seeing the AI trade end or are we seeing greater selectivity where the weaker players that have higher expenses are not going to be able to get financing and how much does that reduce growth? It is a more nuanced discussion and that is why you've not seen a wholesale fleeing of the equity market. People are nervous. Credit markets are pushing back and so are equities.
I think 2018 is a decent comparison. When spreads blow out and you start to get nervous about something breaking, we are talking about 100 or 200 basis points in a quarter. 2018, yesterday, that was a move of 200 basis points. Half of that came in December. Pretty nerve-racking stuff. It is worth pointing out you've seen a move in spreads and high yields for some of the AI-related credits, you are seeing a real reassessment of credit worthiness, but for the index we are still talking about 70 basis points or so of spread widening.
Especially since everyone who comes on says you can lock in these incredible yields. The issue is CCCs blowing out. Can you have not necessarily a bankruptcy cycle but the weaker players get blown out and stop the cycle we have been in and that is what the market is playing with.
Let's get you up to speed on some of the single names and morning movers. Isabelle Lee has more.
Take a look at Western Digital. Shares under pressure, down nearly 2%. Concerns are overshadowing the earnings beat and the profit outlook we saw because of the AI spend and its impact on margins. The company more than tripled its capital spend in the first quarter as it wrapped up its high-performance disk drive. Investors are starting to question the durability of this AI spend. Let's take a look at Moderna. Shares down nearly 5%. The company's long-awaited personalized melanoma vaccine failed to convince investors a new era of cancer treatment is here. The company announced plans in August and that caused a lot of excitement. We have the full data trial Thursday and that tempered lofty expectations. Let's take a look at Deckers Outdoor, the parent of Hoka and Ugg. The footwear company cut its sales outlook. They did increase their 2027 earnings forecast but that included a one-time benefit from tariff refunds.
SpaceX expanding its infrastructure footprint. The company is in talks to secure at least 80,000 sites across the U.S. with the help of one major cellular infrastructure firm. That name is up this morning. SK Hynix scrapping plans for the U.S. listing of a unit. The company citing recent capital market conditions for the decision. There goes another one. OpenAI lowering its valuation target. Sources telling us the ChatGPT maker has shifted its value by $50 billion in recent talks, bringing the new target to $225 billion.
$2.4 trillion at a time this is one of the big kahunas. $2.5 trillion OpenAI versus the $2 trillion Anthropic. The sucking sound you hear is money going towards these players and nobody else. If there is an Anthropic IPO it comes with nobody else doing IPOs. To the degree the IPO window is open to the selective players, the question is at what valuation and how much do investors welcome it versus fear it at a time of real questions around capital raising.
Dan Ives with us around the table. What is breaking in your world?
I was just in Asia last week. The demand has accelerated 30% over last month. The AI stuff we will see from hyperscalers next week. Like you talked about, given 20% will have to be financed via debt, capital raises, the pressure, the CoreWeave worries. The reaction we saw with Meta was a scratcher relative to numbers. As nervous as I have seen relative to the SaaS apocalypse.
You mentioned a couple of companies. Let's draw a distinction between some of the major companies with massive balance sheets and the more speculative leverage players. You mentioned CoreWeave. The market is starting to question the business model. If those neo-cloud firms went away, and just do the scenario analysis with me, if that business disappeared what would it mean for the marginal demand with the chipmaker?
Even NVIDIA, that is 10%. The neo-cloud, you almost need more neo-cloud from a capacity perspective than we have today. I would argue CoreWeave are consolidators to some extent. What we ultimately see on the neo-cloud side. Today demand and supply is 13 to 1. It comes down to those that argue the demand is not there relative to the capacity, I would argue it is the opposite. When you look at the hyperscalers they will continue to ramp up, you will see that with the hyperscalers. I view this as a growth scare or credit scare, but I do not think it dents my view that we are in year three of an eight to 10-year buildout. This is Vegas Strip 1955, the buildout. I'm not saying in 1956 there were not issues. That is how big tech companies are viewing it.
Are you saying it is a casino?
Not in the casino but in the fact there is one strip. If you do not have a spot on the strip, ultimately you will be in Reno.
The question is not just whether you are building out the strip. It is how long it will take. Does the disappearance of some of these neo-clouds end up slowing down the buildout and prolonging the cycle and the earnings for the likes of NVIDIA and some of these semiconductors? On the margins in the near term the short-term demand goes away.
My view right now is if there are neo-clouds that go away, that capacity ultimately gets bought up. I do not think that necessarily slows it down. My view into midterms combined with what we see on the credit side, 5% of data centers do not get built. You still have 800 to 1,000 data centers that get built and for every dollar there's a five-dollar or six-dollar multiplier and that second or fourth derivative speaks of the Palantirs, the Snowflakes, CrowdStrike's.
I am hearing from you that the bigger will get bigger because they have the cash flow to finance this and more of this will have to come out of cash flow. More of them will have negative cash flow going forward and will not see the desirability to turn as much to debt markets to finance this. Is that what you are seeing that could affect the equity valuation but they could emerge the winner overall in terms of the scope?
It's a balancing act for them. Let's say Microsoft pulled back, Amazon pulled back. Others would accelerate. You talk about Anthropic, they will IPO in November. As OpenAI goes public about whether $1.2 trillion or $2.4 trillion, the arms race gets accelerated. The tech companies recognize there is 12 to 18 months to do this. There is a window to do this. What they see from their customers, they are waiting in line trying to accelerate where they will be. Microsoft can do it. If they cannot do it they will go to Amazon. If they can't do it they go to Google. That is why Oracle is in a tough spot because they are trying to be a hyperscaler on debt and that is why the stock you continue to see reflected.
Yesterday dozens of lawmakers came out after this Axios report about AI agents breaking into people's bank accounts, notably Bernie Sanders says AI needs to be paused now. Is there more of a risk of something happening given that it looks likely the Democrats will sweep the House and even potentially the Senate?
The worry into the midterms and maybe this has not been talked about as much, the worry into the midterms is more politically because if you have some sort of blue wave, Democrats negative on AI, negative on data center buildouts. Kathy Hochul and the moratorium. That is a real threat. The reality is for every data center that does not get built in the U.S., China wins. You go state to state. If some does not get built in one state you go to another. That from an investor perspective is a concern into the midterms.
If it is a blue tsunami, which some Republicans have told me they are concerned about, do you think we open up lower on the hyperscalers November 4?
If you have a blue wave it would be negative for tech. The question is what becomes grandstanding, political talk versus the reality. That will ultimately be as investors clean through it but that is an issue right now. Any data center slowdown, that stifles innovation. The U.S. is ahead of China when it comes to technology. That is a conundrum. I believe next week, hyperscaler earnings calms down the market.
Meta and SpaceX numbers were pretty good, it did not calm anyone.
The Meta and SpaceX reactions will be more of a buying opportunity compared to how the market reacted. I think it happened at a time where the nervousness was there. New York City cab drivers, there's a lot of nervousness we are seeing. I view this as a SaaS apocalypse 2.0.
Never mind the New York City cab driver. You get bearish, that is when I know it is a buy. Dan Ives, thank you. Let's get you an update with news elsewhere. Vonnie Quinn has more.
France is planning on putting extra troops on the streets as it braces for another weekend of protests. On top of the 20% increase in police, specialist forces used for missions including counterterrorism will be out. President Macron says only protests organized by labor unions will be authorized this weekend. Ahead of the U.S. midterm elections, the GOP continues to rack up donations. While in the shadows, Elon Musk put another $77 million into his America PAC. The Republican Party, its congressional super PACs raised $2.1 billion through the end of the third quarter, topping the $1.3 billion raised by Democrats. Sony's PlayStation 5 sales in the U.S. jumped 22% in November fueled by expectations for Grand Theft Auto VI. Hardware revenue climbed 44%, making Sony the top-earning console maker. The PS5 Pro is already sold out or a limited supply ahead of the release of GTA VI.
Thanks for the update. Up next, new Fed, same playbook.
We removed accommodation about a month ago. I do not prejudge meetings. I do not believe in saying what I might do at the meetings we have on the balance of this year.
Up next we will catch up with former New York Fed president Bill Dudley. You are watching Bloomberg TV.
Futures softer this morning. Not bouncing on the Nasdaq, and Nasdaq down hard. Semis got smoked. Equities down 0.1%. In the bond market, have not forgotten about the Fed.
You forgot about the Fed.
Yields up four basis points. Big repricing lower. Pounce on yields today. Up three on 10s. New Fed, same playbook.
At the Federal Reserve we made it clear we would deliver price stability and we removed a dose of accommodation about a month ago. I don't prejudge meetings. I don't believe in saying what I might do at the meetings we have on the balance of this year. It is a new chapter and we are not in that business anymore.
He is not but others are. Signaling reluctance to hike in October. Bill Dudley writing, "When I was part of that troika I made sure my remarks lined up with the preferences of the chair and what the committee would actually do at the coming meeting." Bill joins us for more. Are you suggesting there might have been coordination between Williams, Jefferson, and the Fed chair?
I would think at a minimum they would have gotten the blessing of Chair Warsh before they said that. If the Fed were to surprise us next week that would be to tell you the troika is dead. My view is the troika has been in place since Ben Bernanke. Every time two members, what they say is consistent with what the chairman wants them to do.
Do you believe it is alive and well or do you believe it is dead? I struggle to see what Warsh might have in common with Williams.
I don't know if we know for sure. Kevin Warsh gave a statement in Bangkok that things are evolving in line with his expectations. He has also confirmed that the Fed is not likely to tighten next week. It is shocking to me if the Fed were to tighten. Kevin Warsh said I want to outsource this to markets. I want markets to give a clear signal. Markets are giving a clear signal.
What does that mean about the current Fed chair's belief in forward guidance if you will outsource it to other members of the troika?
That is why it is not tenable. I don't think you want to give forward guidance to make a commitment to the future, but you want to give information about how you are thinking about monetary policy. If Kevin Warsh is not going to do that then other people on the Fed will and people pay attention to them.
A lot of people were saying after the CPI print it is a signal to the Fed to hike rates with respect to the inflationary pressures. The opposite has taken place in markets. We are pricing out a rate hike and it is not just have to do with rhetoric from the troika. Do you think it would be more disruptive if the Federal Reserve hiked or remained on hold next week?
If they hiked next Wednesday it will be a big surprise and people will be more confused about what the Fed is doing. The Fed will continue to remove accommodation. The phrase, remove a dose of accommodation implies he still thinks monetary policy is not sufficiently restrictive. If you look at the market pricing, the market expects the Fed to tighten two or three times more over the next six to 12 months and keep rates at a higher level for quite some time.
Given the hot CPI and PPI, how does Kevin Warsh come out if they do not hike and explain their decision?
He will say this is an energy shock, it will not be persistent. Talk about the labor market being in balance. The absence of wage pressure. He probably will not say all that because he is reluctant to provide much guidance about his thinking. I think people are frustrated by the press conference once again.
I think so too. Do you think this will fuel speculation the hold is politically motivated?
I don't think so. If you look at the summary of economic projections the consensus was one more rate hike this year and people thought that was more likely in September than October. If you hike in October it creates this notion you are trying to push the market along to a place it does not want to be. The pressure to do something this time is much less than last time because last time markets thought the Fed would tighten before talking about Fed independence. The same pressure this time because he did restore his credibility last time. I don't think the pressure is the same way as last meeting.
Is there a risk this is old Fed thinking and we need to change the way we think about these things? The slightly tighter financial conditions, isn't that a prerequisite to get inflation back to target on what the Fed has called a timelier timeframe?
I would agree with that. One thing I'm confused about. Kevin Warsh said I can get inflation down without having any negative consequences from the labor market, that raises the question of what is your model of how inflation works. My model is it is about pressure on resources. You have too much pressure and that is driving prices up faster than you want, you have to remove the pressure by tightening monetary policy. I am confused about what his inflation framework is.
If they remain on hold, are they willing to say they are not willing to torpedo the AI trade to bring inflation under control in a timelier manner?
I would not take it that far. I think it just is a pause and I expect the Fed to tighten in December. Same trajectory. The energy price shock is bigger. The Iran war seemed more intractable. There is plenty of pressure on the Fed to keep going in the same direction.
Good to see you. Lots to think about. Bill Dudley, former New York Fed president. To Bill's point, they have inflation coming back to target, the same way they have always been forecasting it over the forecast horizon. Unemployment 4.1 for 2026, 4.1% for 2028. Inflation coming down and unemployment not climbing.
At some point do they continue on this glide path, every just two years it gets pushed out longer and do they ultimately have teeth behind this?
Is it reasonable or just aspirational? We have asked that question a number of times. I am right there with Bramo. I'm just saying that to support you.
The market is giving them a pass but this is the same Fed with forward guidance. They have forward guidance. Like Bill Dudley said it would be a statement it is not to have it but ultimately they still have it.
Making it complicated for the Fed chair. The second hour of Bloomberg Surveillance is up next.
You look at the data, inflation is a bit of a concern. Monetary policy at the moment is not restrictive. Wants to look through supply shocks like it did in the past. Splitting hairs and it's a game-time decision. If Chair Warsh wants to establish his independence, now is a great time.
This is Bloomberg Surveillance with Jonathan Ferro, Lisa Abramowicz, and Annmarie Hordern.
I love market banter, torpedo. No one is expecting that move next Wednesday. Good morning, good morning. The second hour of Bloomberg Surveillance starts right now. I say no one is expecting it. Bank of America and BNP...
Couple are looking for it. -5.3 on the S&P. The Nasdaq down by 0.2%. On the month for October, down 5%, almost, on the Nasdaq 100.
Where tech has gone, the yields have gone lower. Down 30 basis points for the month of October on U.S. 10s. 10s have had a steep fall over the last week, lower by more than 30 basis points in just about a week and change.
Yesterday we saw the biggest one-day decline in 10-year yields going back more than two years. Because inflation and oil prices are going down? No and no. There's a flight to quality amid concern about the AI financing bubble, and people are — not the financing bubble, the financing buildout. There is a sense that —
Some people might call it that. I don't want to necessarily inject that opinion.
Needless to say, people are concerned that maybe some of these financing ambitions have gotten ahead of their skis.
Microsoft, the big hyperscalers, it will be good once again back protect. Michael Hartnett at Bank of America disagrees. He says this mood is likely to continue well into November because the market needs to really start digesting and understanding there's going to be a Democratic sweep in Washington, D.C.
Dan Ives needs to come up with a new analogy. Building out like the Vegas Strip probably doesn't work for an equity build right now.
If you want to convince people, you don't need to tell them, you just need a little more money to build the casino. Ultimately, it's an analogy with some flaws. The reason it has flaws, even according to Dan Ives, as he thinks the reason there will be a positive spin on next week's earnings report is because of demand. We've heard of demand continuing to increase time and time again, so now it's a game of who has the balance sheet to support this kind of demand and buildout in accordance to it, and who loses? That ultimately is the bifurcation we are seeing.
This is the earnings, didn't forget. Didn't forget last time.
Google, Microsoft, Amazon. Chairman Warsh on Wednesday. All of that still to come over the next week.
It could be really interesting because this week the opinion is very negative. There is a feeling people are looking for why they should be risk-off.
Really, we got Tesla, SpaceX, Meta, all the earnings you could argue had a lot of bright spots. The fact that all the names were punished, even though the narratives about why were sometimes at odds with one another, give you a sense of the bias inherent in the market moves this week.
Next week it has to be about the Fed and whether forward guidance is alive and well or not. Chairman Warsh, wink, wink, nod, nod, to the Jefferson say October is off the table, and that's why market expectations are lower on an October hike. We have two Fed officials, part of the troika, saying we are not going to hike. And then the chairman coming out and saying, I don't give forward guidance. Which is it?
We have guidance. One and two. CoreWeave. What is intriguing about all of this, last Wednesday when we had the core CPI read, yields started to bounce, 5.30 on 10s, now we're 5% off the back of a move in credit. We talk about it repeatedly. Where tech goes, equity, credit, yields go, and that has been a story of the last week, month, even the last year.
Six months ago people were saying the AI financing trade is rate insensitive. Yesterday Torsten Slok of Apollo came on and said they might be rate insensitive, but they are not yield insensitive. You saw this with CoreWeave, suddenly borrowing costs going from 9% to 60% in a couple of months, it's a game changer.
Coming up, we will catch up with Jean Boivin, Rebecca Babin, and Vishwanath Tirupattur.
“Our fundamental convictions on AI remain intact. High rates are differentiated by the ability to generate earnings above the rate of...” What changed your views on Treasury versus equities? Let's start there and why.
Since June 2020 we have been systematically negative on the weight, U.S. Treasuries, duration in particular. We moved quite a bit since June of 2020. The rates we've seen this year have been reaching levels now that we think is getting more and more in line with the environment we've been arguing we were in. When you are getting to 5.5 on the 10-year, that starts to be levels that you need to reassess, so we've reassessed. Turned more positive across the curve on Treasuries.
At the same time we think the story of 2026 has been one where expectations on the buildout have been just ramping up like crazy. 30% revision on the number that was the largest, fastest buildout in history at the beginning of the year, 30% higher than that. I think 2026 has been about reconciling what that means for the cost of capital. We think this is the biggest driver of rates. But in that context, I think the trajectory of the buildout is a lot more uncertain now. Given all of the revision upward, there are factors now I think we can temper those expectations. You know, the way that society is now dealing with AI, the concern they have, there is the financing costs, all of these things they can start to slow things down, so we become more neutral, circumspect, I guess.
One thing, the cost of capital. Repricing credit, to this point, how has that changed the trajectory of the buildout for you?
I think we will be struggling with that for months to come. This is an increasing rate environment that is driven by, again, demand for capital like we've probably never seen. Financing needs. We talked about we will be leveraging up for a year and a half now. So that is happening. And the cost of capital is going up as a result, but it's very different from the previous rising rate environment where it was maybe the supply of financing that was retrenching, concern maybe about credit, and sentiment. So it's driven by positive forces. Ultimately we are going to adjust and be able to support this higher cost of capital, but not all business models may be developed for an environment where five is more of a norm than four on the 10-year.
You could have said this a month ago, two months ago, and someone would have argued in response, but the earnings are amazing. Earnings, earnings, earnings, earnings. That's what we heard from everyone who came on. Earnings are still really good. Why is it different than earnings can't compensate for the concern about higher financing costs?
I think the bill that we are talking about, again, we are talking about $7 trillion to $9 trillion by 2030, is such a huge number it's not enough to just have numbers that continue at that pace. We are going to have to be at a level of earnings that is abnormal for the next few years. We do believe it's possible. I think that news was all factored in, and now that we are moving, expectations have gone up in terms of the buildout, questions about whether we will really be able to build all of this as quickly as expected is becoming a bit more clear. Again, you are seeing the environment, you know, the reaction to data centers, things like that, I think you can start to see some headwinds in place now.
You upgraded your view of Treasuries and downgraded your view of equities. Going into bonds, how far does that go? What is considered safe? French bonds, some of the riskier high-yield bonds that seem like they're coming from stable business models?
We think income in general, particularly short duration across the fixed income world, is particularly attractive. Selectivity and so on, there will be pockets, but overall we are pretty bullish on the short income story. The view about longer-term duration is the U.S. Treasury story. I think this is really the change in view. We have been systematically negative on long-term U.S. Treasuries, now we think they have started to be attractive. I think five on the 10-year is starting to look like fair value and I don't see much reason for that to go much higher than that. We will get carry from that that will justify adding.
I'm trying to work out if this is a tactical call for you and the guys or a call you're holding in the next year. I want to give you some credit. Since October 12, down five basis points on 10s, 5% on the Nasdaq. This has worked out really well. Is this something you want to hold? I don't see scope to go much higher than 5.50. You see scope for them to go much lower than where they are?
Not much lower. That is why the income you're getting and so on is the big story. It's not about them falling from here. It has been pretty tactical the last two weeks. The timing has been positive in that respect. I think this is tactical in the sense that for the next six to 12 months we think that we are in an environment where there won't be much capital exposed to in long-term bonds. And there is going to be really interesting carry.
An interesting point to that story, the story this fall has been 10-year yields are going up because of oil, and people pointed out the strong correlation with oil. We are of the view this was more of the AI story, the buildout, the competition for capital. I think you look at the last two weeks, it has been consistent with our equity view. We think there might be some headwinds for the AI buildout that will slow down a bit, it will renew the pressure on yields. I think that's the next few months' story. Oil, I think we've seen the last two weeks, that has broken. Oil is 14 latest.
What would it take for you to be excited about equities again in lieu of bonds?
We will get excited again about equity, I think that will be the next move, but I think we need a bit more clarity on the speed of the buildout, some assessment of these numbers. 2027 is a bit at risk. Maybe some revision down on the actual capex will be deployed. Once this is clear, we believe the story, so we will reengage.
Jean, fantastic call. The correlation between the Nasdaq and yields has been so tight this month.
How much is this concern about money's going away from Treasuries to fund the capex of AI? If they ratchet back their revisions even a little bit, all of this money goes flooding back into Treasuries because it speaks to the juxtaposition we've been talking about for a while.
Down a quarter of 1% on the S&P 500. Let's get an update on news worldwide with your Bloomberg Brief.
John Dunn, American investors have turned lower, down 1.1 percent. The company raising its full-year guidance as affluent consumers spend more on premium credit cards. The global payments company also booked a $750 million after-tax gain following the sale of its equity interest in Global Business Travel Group.
SK Hynix stopping plans for a potential $10 billion U.S. listing of its Solidigm unit over concerns the IPO could dilute existing investors. The reversal comes as volatility around artificial intelligence is cooling investor demand for new listings.
Airbnb is limiting the chores hosts can require of their guests. The change comes in response to complaints from travelers who say they shouldn't have to do housekeeping while paying cleaning fees. That is as of November 30. Hosts will be required to set “reasonable” house rules and to disclose them in a designated section of their listing.
More from Vonnie in about 30 minutes' time. The president targeting the farmer vote.
The Harvest Fuel Relief Program providing our farmers with $8 billion.
Republicans are getting squeezed in farmer country. That conversation is just around the corner with Kurt Reiman of UBS. Good morning, good morning.
We are headed towards the second week of losses on the S&P, no recovery on the S&P 500, futures are negative once again, down by 0.2%. The Nasdaq 100 resetting lower in yesterday's session, much, much lower for the chip stocks. Down around 0.1% on the Nasdaq. The bond market repricing on the long end, two straight weeks have had double-digit declines on the long end of the curve. 4.99 on 10s.
Keep reflecting on this. Last Wednesday, hotter-than-expected core CPI appeared, yields blowing out to the 5.30s on 10s. We have come in so much in a very short period of time.
Is this a concern about growth, about inflation maybe torpedoing the bond, or is it simply the idea coming in if the ambitions of some of the AI hyperscalers have to be ratcheted back as a result of pushback in credit markets? Ultimately that question will decide if you can still have a generally positive risk tone into the end of the year.
The decoupling a lot of people are talking about, the move in crude, crude is still going higher, around 115 today. Crude, 101, let's round this up.
Which is why people might be scratching their head when they look at interest rates, saying a size correlation they've ever had to the oil price. We are actually not seeing that. The correlation now is tech and yields.
The price of fuel is rocketing, has been rocketing all year. Under surveillance, the president targeting the farmer vote.
We are taking care of our farmers and everybody else. Announce the Harvest Fuel Relief Program providing our farmers with $8 billion to offset these costs in the harvest season.
The latest this morning, President Donald Trump looking to shore up GOP support in the traditionally red state of Iowa as high diesel costs squeeze farmers and rural communities. Tyler Kendall has the latest. Hey, Tyler.
Hey, John. President Trump has been touring these farm states this week where there are closer-than-expected midterm races, including where I am in Kansas, President Trump visited here on Monday. Republicans are now defending a Senate seat the Democrats have not won since 1932, but it's very clear that higher fuel costs have been a driving factor in all of these races right in the middle of harvest season.
The national average for a gallon of diesel today, $6.32. In Kansas it is a little lower, $6.07, but still significantly higher than before the conflict in Iran. These states are highly exposed to farming fuel costs, trucking costs, but also I want to mention fertilizer costs, which also are well above prewar levels. At this point we have seen the Republican administration try to put forward some solutions. You heard President Trump tout this $8 billion package to farmers, expected to be delivered in one-time payments. Our own analysts at Bloomberg Economics say the biggest shift in voter sentiment over the last two months has been in Midwestern red states, creating a drag for the GOP.
John, we should say despite polling, we are seeing Republicans in Kansas with a slight edge in the competition.
Looking forward to your coverage into the weekend. Kurt Reiman of UBS, the stronger-than-expected Democratic showing in the midterms could pull forward expectations about the 2028 election and spill over into market pricing. Kurt joins us for more. Good morning. What is the problem in farm country?
Tariffs, high diesel prices, the agricultural community is having a tough time right now. It is showing up in the numbers. Some of these Midwestern states are still within the margin of error for the Senate, but you have strong governors that are showing up at the top of the ticket. That could show up down the ballot. Democrats could have a very good night on November 3. We are watching that. I think it's important to think about where the direction is heading.
But right now, still, our probably odds on the Senate are around 50-50 with the Democrats potentially taking control. Better odds in the House. Add it all up and you have a 90% chance of having a divided government in the next two years.
Do you think the billion-dollar bailout gets it done?
The $8 billion bailout? No, I don't — it can't move the needle. People are already voting. They have already gone to the polls. They have already made up their mind. There is not much that can happen in two weeks.
One thing that I would be thinking about, though, is the amount of spending on ads that could potentially move the needle. There is a lot of money here in the last couple of weeks, or last 11 days, mind you. That could be the difference. Again, these are very tight contests. It is not — even though the prediction markets are showing that the Senate probability is very high, we take a different view. It is still a very narrow edge for the Democrats to take that.
Where is it most narrow? Which Senate races should we be paying the most attention to?
We have to be paying attention to Texas. That has been in play. I would also say Iowa is another one. Alaska, Maine, Michigan. These are the ones we are watching.
Republicans are likely to lose North Carolina. Democrats are likely to also hold on to Georgia. If they can hold on to Michigan, that means they only have to get three of those. But they have to get three of those in order to take control. They have to get the 51st seat in the Senate in order to be able to influence the legislation that hits the floor, and potentially also align with what seems likely to be a Democratic House.
A little bit of a question is also not if they take the House and the Senate, but also if it is a large victory. If it is a wave, a ripple or a wave, then we could extrapolate, the markets could temporarily extrapolate forward what it means for the 2028 outcome. I think it is too early to be making that kind of a trade. I don't think there is an election strategy in this at all. We are not changing our portfolio as a result of this, because the bottom line is that policy-making is going to be very difficult in a divided government scenario.
There have been a lot of prognostications about what a Democratic sweep would mean. One of them was more data center regulation. You are saying it could lead to higher Treasury yields? Can you explain?
Well, I think it is higher for longer, not necessarily we go from just under 5% to back to 5.25%. It is just where we fall back to. I think it is higher. So, higher lows.
There is a scenario legislation last year is bringing in spending cuts. They did not take place in 2026. Gradually building over the next decade to Medicaid and other assistance programs. But you also have a 2027 debt limit that has to be raised. How do you do that? How do you do that where there has to be compromise?
The simplest compromise to us is, well, Republicans get some additional defense spending and it gets a postponement to the social program cuts, and that means that you have instead of deficits shrinking, you have deficits that are shrinking less or staying around where they are. That, in my mind, is keeping the pressure on longer-term yields.
We have been talking about how Treasuries are a flight-to-safety trade right now as a result of people getting concerned about AI financing and the potential limits for some of these names. If there is a data center prohibition, limitations, could that help the fixed income trade on some level because there wouldn't be as much competition for capital coming from the AI sphere?
I suppose, but we are already looking for a slowdown in the growth of capex. It's growing, but it's not growing by as much. Then, when you think about some of these data centers, when there is credit concerns, the neo-clouds, their rental rates are going up still. Even if they have a financing problem, it is not that this is an asset problem. On the moratoriums, I don't know, I think of this as just being data centers built on different terms, not data centers not being built. Right. So you end up having, you know, it to be more favorable to the local community as opposed to giving tax breaks, and maybe you get a road paved or a bridge built in the process, right. So the data centers I think are going to get built, maybe in a different location.
But also, the attachment to this idea that right now it is not politically reasonable to be favoring data centers. You're not going to be going out into your local communities and talking about how much you love them, but after the election, well, that is a different story, especially if you don't have to give out tax breaks and so forth.
I don't really buy this growth slowdown narrative, that to slow down is gaining pace. It's expected. Earnings growth is expected to slow. GDP is expected to slow. Inflation is likely to come down. I don't know. I don't really buy that this is as much as it is being made out to be.
Kurt, good to see you, thank you for being here, Kurt Reiman of UBS. Next, Rebecca Babin with Brent approaching 115.
Futures negative this morning, down 0.25% on the S&P 500, down 0.1% on the Nasdaq. The worst day since July. Chip stocks getting absolutely hammered in the last 24 hours, they have been cratering over the last few months. Still up pretty nicely.
It has been a rocky road for big tech. Some of the major tech players on the Nasdaq 100. Where tech goes, yields slide. Down at one point by almost 20 basis points in a single session on a 10-year.
That is like the SVB regional banking crisis collapse in a 10-year yield in yesterday's session.
The reason I got a lot of messages, is there a massive short covering? Either way, people are suddenly seeing the risk-off proposition for long-term debt as highly attractive versus some of the best riskier propositions. At the same time, the Treasuries are finding a bid from the likes of BlackRock.
Crude higher, Brent and WTI approaching 115. A lot of people talked about the decoupling in crude and what has happened with bonds. Look, I think banks are talking about this this morning. Treasuries are still a good hedge against the demand shock, a potential demand shock. A supply shock like what we have seen in energy, not so much. That is the story of the year.
It is not necessarily going to protect you when it comes to the inflationary pressures from oil. Nonetheless, people see the potential for disinflation down the road, even in the face of high oil prices. If you don't have the AI-related tailwind behind the U.S. growth story, and that is ultimately why this time is different.
Is that why nominal yields have been up so much this year? Nominal GDP has been a topic because tech buildout is so strong? You start to question the tech buildout and everything unravels from there. It has been a chain reaction on the tech side into yields.
I'm struggling with how much this is a growth statement and how much this is a competition-for-capital statement. I don't know the answer. I think it is probably something about right now, and people are still waiting and mining the economic data to understand how much of a growth scare this actually transpires to be, and whether some of the data centers actually stall out or do get solid season some of the neo-clouds.
Does it amount to the same thing?
I can promise you 20% returns on the equity side, and I'm raising capital to do that, I'm not going to be buying Treasuries. Isn't it kind of the same thing? If I can promise you those returns, I will go into Treasuries.
Jean Boivin, now that they are seeing less of a trajectory for upper valuations and more a detractor proposition into bonds.
25 basis point declines on 10s over that period, and you see the Nasdaq down by 5% over the same timeframe.
Do you think they are behind that?
Should have blamed him. Some single names, morning movers. Isabelle Lee has more.
In the green premarket trade, higher 2%. We have Bloomberg reporting the company hopes to secure at least 80,000 cellular sites in the country, and it is also in talks with at least one major cellular infrastructure tower to get there. So this deal could be worth billions of dollars. And if this pushes through, it would bolster SpaceX's path to becoming the fourth nationwide wireless carrier in the country. One of those that it is currently in talks with is Crown Castle, one of the largest owners of cellular towers in the country alongside American Tower and Vertical Bridge.
Finally, let's talk about SK Hynix. You see the shares also higher by more than 4% in premarket trade after scrapping a potential $10 billion listing with Solidigm. The stock is popping because investors are interpreting this as a shareholder-friendly move, because this risk, removing the dilution that has weighed on the stock. John, this is one of the latest companies to pull an IPO amid all of the worries over the area capital spend.
More from Isabelle in our next hour. OpenAI lowering its valuation target from $1.4 trillion to $1.25 trillion ahead of its delayed IPO. The company looking to raise about $30 billion in its latest round of funding.
Elsewhere, President Trump reportedly asking Elon Musk to lift restrictions on Ukraine's military-grade Starlink satellite system. The president expressed his frustration of the cap connection at speed.
And finally, France bracing for fresh protests this weekend, rolling out the military and police in a bid to curb violence. The cost-of-living crisis and record-high global food prices driving the unrest around the country.
It seems based on early planning they are going to be much more in force. I think it's 20% bigger police presence as well as the military. Will this be enough? Maybe you're getting a little bit of bid in different fronts this morning, but really, how much is the solution going to come with a wholesale recognition of crisis conditions right now in France?
The interior minister says at this time they are going to be uncompromising when it comes to hooligans. It is not just Paris, it is all over France. A different approach at this time around. You have Emmanuel Macron, according to AFP, deciding to postpone his trip. He is supposed to be going to Nigeria and Senegal, and he will stay home because of how bad the protests moved into riots, the looting and the chaos we saw in the streets of France.
Tracking the potential for financial stress on the back of this, and we have been talking about the potential of spilling over from sovereign into banks. The banks on the Euro Stoxx, down 5%, double digit this month. That is what I will be tracking, is whether you start to see the wider spread start to infect the financial sector as well. That's going to get a little unnerving for the ECB and others too.
So far the financial sector doesn't seem to have the same systemic risk. One of the reasons why is increasingly banks are gaining strength from the share business they have outside of Europe. The European loan books and credit portfolios are not driving any growth whatsoever, but the operating performance is how much they have expanded in Asia and expanded in the United States. Ultimately that becomes a baluster them at a time when it is a very regional crisis in a couple of specific —
What you said is true across corporate France. French corporations, large ones, you noted this a few times, trading inside the credit market, trading inside the sovereign, which speaks to the gap between the two, and let's hope it stays that way.
